22 Year Old - Second Deal: $57K Profit Flip with Partners
This was my second deal after the house hack I completed in 2018. Going into this deal the mindset was to gain experience and thought of any potential "losses" as tuition to the school of hard knocks. I learned a lot from this one and am satisfied with the outcome.
Myself and three other partners (@Marlon Walls) completed this flip on the NW side of Houston, TX. The house was a 4 bedroom / 2.5 bath / 2 detached, with a pool. It did not need major work because it had already been rehabbed but not complete. Overall, the pool needed to be completely redone, needed updated windows, finishing out the garage with drywall, replacing the carpet upstairs, and a little bit of landscaping. About a 1 month rehab timeline. This property was originally intended to be a BRRRR property however after the refi we decided it would work better as a flip. That's the great thing about the BRRRR method, it allows for at least two exit strategies if you do it right!
We purchased this property off-market from a wholesaler. It was listed for $145K and we got it for $152,789 with an expected ARV of $210K and financed it with hard money. The HML terms were very favorable due to the fact that we were going to be refinancing with their preferred mortgage lender (didn't know it would be a flip at that time). We paid 7% interest for one month & no points. Essentially, we got a BRRRR loan from the HML. The rehab ended up being about $21,000. The appraisal came back at $213K and we refinanced at 75%, paid back the HML and got a 30 yr loan for $159,750. This was able to cover closing costs and also reimburse us $16K for the rehab expenses.
At this point it was time to get the property rented out. After getting everything stabilized and looking deeper into the actual numbers there were a multitude of factors that led us to decide to sell. For one, we realized that we wouldn't be able to hit the 1% rule with the ARV we achieved (area didn't call for $2,000+ in rent), the pool maintenance on the property was about $200/mo which would kill any little cash flow we did get, and the time of the year (late September) was not favorable for filling vacancies. In order to cash flow on this property we would've had to rent it out at $2,500 per month. Not impossible but very unlikely. So we decided to list it in late September 2018.
We listed the property at $224,900 and after about 3 months on the market, sold it for $216,900 in early January 2019. During this time we paid about $3,500 in holding costs. So in the end we ended up making approx. $57,000 in gross profit.
Moving forward we know that if we want to BRRRR in our market we have to purchase properties that are below $100K and have a maximum ARV of $175K. That way we can achieve the 1% rule and also have a larger rental market.
Lessons learned:
1. Always confirm your analysis. We didn't consider the $200/mo pool maintenance in our analysis, which obviously is a big hit to your cash flow. We also weren't sure what our interest rate would be on the refi loan when it was originally intended to be a BRRRR. So it will be smart to confirm what loan you'll be able to get with the mortgage lender before getting into the deal.
2. Be ready to change your exit strategy. Unexpected things come up that may force you to change your exit, however I believe that buying right makes this decision a lot easier. This property may not have been a good rental but it was always a good flip because we bought it 28% below market value.
3. "Take what the defense gives you." As of January 2019, we are seeing plenty of properties that would be great flips, while we are having to tweak our metrics to find properties that would be great BRRRR deals. If that's what the market is calling for, we'll take it. No need to force anything. As investors, market cycles will always call for adaptation on our part.
The goal for 2019 is to complete 7-10 deals using the BRRRR, Flip, and House Hack strategies. I mention house hack because I will be eligible for another owner occupied loan this year. I'm excited for the challenge!
Here are some pictures of the property post-rehab.